Circular No. 8/2014, Dated: March 30, 2014

Sub: Interpretation of Provisions of Section 10(2A) of the Income tax Act, 1961 in cases where income of the firm is exempt-clarification regarding.

A reference has been received in the Board in connection with the interpretation of provision of Section 10(2A) of the Income tax Act, 1961 (‘Act’) seeking clarification as to what will be the amount exempt in the hands of the partners of a partnership firm in cases where the firm has claimed exemption / deduction under Chapter III or VI A of the Act.

2. The matter has been examined. Sub Section (2A) of Section 10 was inserted by the Finance Act, 1992 w.e.f. 1.4.1993 due to a change in the scheme of taxation of partnership firms. Since assessment year 1993-94, a firm is assessed as such and is liable to pay tax on its total income. A partner is not liable to tax once again on his share in the said total income.

3. It is clarified that ‘total income’ of the firm for sub section (2A) of Section 10 of the Act, as interpreted contextually, includes income which is exempt or deductible under various provisions of the Act. It is, therefore, further clarified that the income of a firm is to be taxed in the hands of the firm only and the same can under no circumstances be taxed in the hands of its partners. Accordingly, the entire profit credited to the partners accounts in the firm would be exempt from tax in the hands of such partners, even if the income chargeable to tax becomes NIL in the hands of the firm on account of any exemption or deduction as per the provisions of the Act.

4. This may be brought to the notice of all concerned.

5. Hind version to follow.

F.No.173/99/2013-ITA-1

(Deepshikha Sharma)
Deputy Secretary to the government of India

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0 responses to “Partners not liable to pay tax on exempt Income in the hands of firm – CBDT”

  1. Chirag Jain says:

    Mr. Panda,

    Your question is not clear. If I understand correctly, you’re trying to ask that if the remuneration & interest is allowed as a deduction in the hands of a firm, then should Partners be paying tax on the same on their personal account?

    • Natabar Panda, Advocate, High Court of Orissa says:

      Mr. jain,
      I want to say that Salary & Interest are generally taxed in the hands of the partners.Firm is also assessed as such on it’s total income. But in the situation when firm is assessed U/s.144 what is happening generally – the Firm is to pay tax on entire income including the disallowed income. Again the partners income is not suomotu rectified by the AO and they pay tax on their income, which includes salary & Interest. It amounts to double taxation.
      But the above Circular of the CBDT in my opinion is of no use. Because share of profit after payment of salary & interest to partners was earlier exempt in the hands of the partners.

  2. Natabar Panda, Advocate, High Court of Orissa says:

    Dear Friends, I want to bring a situation where Firm has been assessed U/s.144. The A.O. has no alternative than to disallow the remuneration & Interest paid to partners.In the said circumstances what would be the implication of the above Circular? Because Circular cannot over ride the Statute.When remuneration and interest is allowed as deduction in the hands of the Firm there remains hardly any dispute in that case.

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